Pembina Pipeline Corporation (NYSE:PBA) Q4 2023 Earnings Call Transcript

Pembina Pipeline Corporation (NYSE:PBA) Q4 2023 Earnings Call Transcript February 23, 2024

Pembina Pipeline Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen and welcome to the Pembina Pipeline Corporation Q4 2023 Results Conference Call. [Operator Instructions] This call is being recorded on Friday, February 23, 2024. I would now like to turn the conference over to Cameron Goldade, Chief Financial Officer of Pembina Pipeline. Please go ahead.

Cameron Goldade: Thank you, Lady [ph] and good morning everyone. Welcome to Pembina’s conference call and webcast to review highlights from the fourth quarter and full year of 2023. On the call today we also have Scott Burrows, President and Chief Executive Officer; along with other members of Pembina’s leadership team including Jaret Sprott, Janet Loduca, Stuart Taylor and Chris Scherman. I would like to remind you that some of the comments made today may be forward-looking in nature and are based on Pembina’s current expectations, estimates, judgments, and projections. Forward-looking statements we may express or imply today are subject to risks and uncertainties which could cause actual results to differ materially from expectations.

Further, some of the information provided refers to non-GAAP measures. To learn more about these forward-looking statements and non-GAAP measures, please see the company’s management’s discussion and analysis dated February 22, 2024, for the period ended December 31, 2023, as well as the press release Pembina issued yesterday which are available online at pembina.com and on both, SEDAR and EDGAR. I will now turn things over to Scott to make some opening remarks.

Scott Burrows: Thanks, Cam. We’re pleased yesterday to report our fourth quarter results which include quarterly earnings of $698 million and record quarterly adjusted EBITDA of just over $1 billion. We also delivered record annual adjusted EBITDA of $3.82 billion, which exceeded the high-end of the original 2023 guidance range and reflects the strength, predictability and resilience of Pembina’s business. In 2023, we saw growing volumes across many systems supplemented by the value enhancement from another strong year from Pembina’s marketing business. The positive momentum in Western Canadian sedimentary basin could be seen by more than 4% year-over-year increase in second half volumes and the conventional pipeline business.

In 2023, Pembina progressed [indiscernible] by sustaining and enhancing our business through various accomplishments we shared throughout the past year, including signing new contracts in the Peace Pipeline System, signing new and/or extending existing contracts with the Redwater Complex, reactivating the Nipisi pipeline and approving new projects such as the 55,000 barrel per day RFS IV expansion, the expansion of the Northeast BC pipeline and a co-generation facility at PGIs K-Bob III Plant [ph]. In the fourth quarter, positive developments continued including the announcement of a $3.1 billion acquisition of Enbridge’s [ph] interest in Alliance and Aux Sable. Pembina’s business is built around integrated difficult to replicate assets that provide an enduring competitive advantage and unequalled market access for customers.

Alliance Pipeline and Aux Sable are world-class energy infrastructure assets and increasing our existing ownership of them will further enhance our growing franchise. We continue to expect the acquisition to grow in the first half of 2024, subject to the satisfaction or waiver of customary closing conditions. On the commercial front, we announced yesterday that in support of Dallas path-to-zero project [ph], Pembina has entered into a long-term agreements to supply up to 50,000 barrels per day of ethylene and for the associated transportation on the Alberta Ethane Gathering System. The path-to-zero project [ph] is an important development for the WCSB [ph] representing a significant increase to the current ethane market in Alberta. Given Pembina’s existing leading ethane supply and transportation business and integrated value chain, there are multiple opportunities for the company to benefit from this new development through both, the existing asset base and new investment opportunities.

During the fourth quarter, we also closed open [indiscernible] on a Croatian pipeline for a total of 90,000 barrels per day and signed an incremental contract with an anchor customer for service on the Nipisi pipeline, which has now contracted for more than half the capacity on a long-term basis, with line of sight to the asset being fully contract by the end of 2024. On the meter project fund [ph], we continue to progress our Phase VIII Peace Pipeline expansion, and our RFS IV expansion the Redwater Complex. On the Phase VIII project, the capital budget has been further revised lower to $430 million, which is $100 million under the original budget. The construction is expected to be completed in the first quarter of 2024 with pipeline and facility commissioning and start-up expected in the second quarter of 2024.

Our experience of Phase VIII is another example of supporting Pembina’s track-record of strong project execution. Additionally, Pembina gas infrastructure has provided as approved, an expansion at the [indiscernible] plant that will increase natural gas processing capacity by 115 million cubic feet per day, and is expected to be in service in the first half of 2026. The expansion is being driven by strong customer demand, supported by growing production and will be fully underpinned by long-term take or pay contracts. Finally, yesterday we provided an update on the Cedar LNG project. Cedar LNG substantially completed several key project deliverables, including obtaining material regulatory approvals, advancing inter-project agreements with Coastal Gaslink and LNG Canada, signing a heads-up agreement with Samsung Heavy Industries and Black & Veatch, and executing a lump sum engineering, procurement and construction agreement to provide Cedar LNG with the necessary services to construct the project.

While a lot has been accomplished, there remain a number of scheduled driven interconnected elements that require resolution prior to making the final investment decision. These include binding commercial off-take, obtaining third-party consents and project financing. On this basis, a final investment decision is now expected in the middle of 2024. I will now turn things over to Cam to discuss in more detail financial highlights for the 2023 fourth quarter and full year.

Cameron Goldade: Thanks, Scott. As Scott noted, Pembina’s record fourth quarter adjusted EBITDA of $1.03 billion. This represents a 12% increase over the same period in the prior year. In pipelines, factors impacting the quarter primarily included higher volumes of the Peace Pipeline System, Drayton Valley Pipeline and on the recently reactivated Nipisi pipeline, higher poles, primarily on the Cochin Pipeline and Peace Pipeline Systems, largely related to contractual inflation adjustments, and lower contributions from the Alliance Pipeline, primarily due to lower interruptible poles and volumes. In facilities, factors impacting the quarter included higher contribution from the PGI assets, primarily from the former energy transfer Canada plants, the highest plant and the Dawson asset due to higher volumes, and higher revenue at Vancouver Works.

In marketing and new ventures, fourth quarter results reflected net impact of higher contribution from Aux Sable, lower natural gas and crude oil marketing margins largely offset by higher NGL margins, and realized losses on commodity related derivatives in the fourth quarter of 2023 compared to realized gains in the fourth quarter of 2022. Finally, in the corporate segment, fourth quarter results were largely consistent with the same period in the prior year. Earnings in the fourth quarter were $698 million; this represents a 187% increase over the same period in the prior year. In addition to the factors impacting adjusted EBITDA, the increase in earnings in the fourth quarter was primarily due to the net impact of the impairment reversal related to the Nipisi Pipeline, the settlement provision and associated legal fees incurred in the fourth quarter of 2022, all project write-offs, higher depreciation and unrealized gain on commodity-related derivatives compared to a loss in the fourth quarter of 2022, lower net finance costs and higher income tax expense and the recognition of a previously unrecognized deferred tax asset.

Total volumes was 3.45 million barrels per day in the fourth quarter; this represents an increase of 2% over the same period in the prior year reflecting the net impact of the reactivation of the Nipisi Pipeline, higher volumes on the Peace and Green Valley Pipelines, higher volumes from PGI and lower volumes at the Redwater Complex. The fourth quarter contributed to full year results that included earnings of $1.776 billion, record adjusted EBITDA of $3.824 billion, which was 2% higher than in 2022, and exceeded the high-end of the company’s original guidance range. Cash flow from our operating activities of $2.635 billion, and adjusted cash flow from operating activities of $2.646 billion. Thanks to strong results, Pembina generated meaningful free cash flow which was allocated to strengthening the balance sheet and returning capital to shareholders.

In 2023, we raised the common share dividend by 2.3%, repurchased $50 million of common shares and continue to reduce the leverage below the lower end of the target range. At December 31, 2023, based on the trailing 12 months, the ratio of proportionate consolidated debt to adjusted EBITDA was 3.3x, reflective of our strong balance sheet and supporting a strong triple B credit rating. I’ll now turn things back to Scott.

Scott Burrows: Thanks, Cam. In closing, we are enthusiastic about the future given the current momentum in the WCSB and expected continued volume growth through 2024 and beyond. Our broader outlook remains unchanged as we see the potential for mid-single digit growth driven by tangible near-term catalysts, including up to approximately $2.8 billion or 2.8 billion cubic feet per day of new natural gas export capacity from the new West Coast LNG projects, 590,000 barrels per day of new crude oil export capacity from the expected completion of the Trans Mountain Pipeline Expansion, and potential new developments in the Alberta petrochemical industry, including significant incremental ethane demand associated with path-to-zero project [ph].

Given the scope and reach of our business, Pembina is uniquely positioned to benefit from these catalysts. Our investors have come to expect strong and consistent financial leadership from us, demonstrated by a secure and growing dividend, and unwavering commitment to our financial guardrails, a low risk and primarily fee-based business with high take or pay or cost service contributions and a strong balance sheet. You can expect us to continue to execute our strategy with the same financial discipline that has made us successful to-date. In closing, I believe the next five years will be an exciting time in the Canadian energy industry, with exceptional resources, greater access to global markets, and leading environmental and social performance standards.

Canada’s energy industry has an opportunity for greatness. I’m extremely proud of what Pembina and the rest of our industry do to ensure responsibly produce energies available to meet growing global demand. Thank you for joining us this morning. Operator, please go ahead and open up the line for questions.

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Q&A Session

Operator: Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Jeremy Tonet from JPMorgan. Your line is open.

Jeremy Tonet: Hi, good morning. Just wanted to go into the Dow announcement a little bit more, as far as this ethane supply agreement is concerned. I am wondering if you could frame up, I guess is this all incremental ethane extraction kind of upside new to the system? Is there any redirection? And also, how much of this would you characterize as brownfield versus greenfield investment here? Just trying to get a sense for what the project economics could look like here?

Jaret Sprott: Good morning, Jaret here. Yeah, great question. So super excited to obviously announce our contribution to Dows net zero cracker here in Alberta. With respect to our supply, it is going to be a material increase to Pembina’s overall supply. It will require us to spend incremental capital with respect to getting that supply. You know, we’ve spoken previously about RFS III, that was originally designed as a C3 plus fractionator but has the optionality for us to put DS [ph] on it; so that would be a brownfield expansion. There are other opportunities at Empress and through PGI and/or Pembina wholly-owned extraction assets that we see opportunities. We also obviously see a massive positive with respect to utilization across our asset base.

And with 50,000 barrels of ethane, obviously, a bunch of C3 plus comes along with that; so it is going to be a mix of brownfield and Greenfield opportunities for Pembina and higher utilization across the board. And then on the AX [ph] Pipeline, Pembina has announced that we’re going to be 50,000 barrels. We fully expect that we’re not the only contributor to Dallas supply portfolio, we don’t know where the other portions of that supply portfolio are coming from. So once we understand where that’s coming from, we’ll be in a better position to update you all on AX [ph] expansions.

Jeremy Tonet: Got it. That’s very helpful there. And is there any way to frame what the potential capital deployment sizing or timeframe, or sizing really could be for this?

Scott Burrows: Yes, Jeremy. It’s Scott here. We’ve been progressing, as Jaret pointed out, multiple options — you know, we’re working the engineering and the economics of all of those. So I would say, probably by mid-year we’ll be in a better position to update the market and kind of which projects we predict will be going forward. But suffice to say, no material CapEx in 2024.

Jeremy Tonet: Got it, understood. And just one last one, if I could. The Nipisi pipe and reactivation here, just wondering if you could speak a bit more on the market drivers to this — and I guess, you know, commercial momentum here or what you’ve seen in the market, is there potential to — you know, could this be fully filled up? What type of timeframe could that materialize over and what are the drivers here?

Jaret Sprott: I’ll take that again, Jeremy. So the drivers are the Clearwater formation. So, a lot of activity in that neighborhood — and we expect the pipeline honestly be fully contracted by the end of 2024. We put it back into service last year, we’re seeing very strong utilization — physical utilization today. We’ve signed up incremental contracts, which I believe we announced at the end of last year. And yes, fully see line of sight to having that 100% contracted by year-end.

Jeremy Tonet: Got it. That’s helpful. I’ll leave it there. Thanks.

Operator: Thank you. And your next question comes from the line of Rob Hope from Scotiabank. Your line is open.

Robert Hope: Good morning, everyone. I want to stick on the Dow announcement in the West Groups below [ph]. When you look at the options, do you expect that the incremental ethane supply sources will all be Western Canadian? Or could you be pushing some incremental barrels on Vantage? So just want to get a sense of whether or not you’re expecting this all to be Western Canada or some of the Bakken?

Scott Burrows: Yes. Rob, like — again, this ethane is going to be supplied from a mix of the existing portfolio, as well as new. And the new ethane will come from some of the various projects that we’re currently evaluating as we discussed. There definitely is an option to move incremental barrels on Vantage out of the Bakken, so that is a very real possibility to supply.

Robert Hope: Alright, appreciate that. And then maybe just moving over to the kind of the volume outlook for 2024; a number of moving parts, including we’ll call it rather strong economy [ph] pricing offset by weak Echo [ph] pricing. When you’re talking to your producer customers, how do you think volumes progressed through the year so we can see a little bit of softness in the front part? And then, the ramping up into LNG Canada in 2025.

Scott Burrows: Rob, I think we continue to believe in that mid-single digit growth that we talked about. But we are monitoring producer CapEx budgets pretty closely and have ongoing discussions. And so certainly, it’s on the back — it’s — it’s top of mind in terms of what producers are going to do throughout the — they arrested here [ph]. But to your point, obviously, we’d like Echo [ph] to be a little bit higher for our producing community, but with oil at $77, condensate premium and Canadian dollar earning over $100 for your condensate carries the day a lot of the time; and so we still believe that our producers economics are very robust, just given where condensate pricing is. But we are certainly watching producer budgets, given the weakness in Echo [ph].

Cameron Goldade: And I would just add to that, Rob on top of the liquids market of the condensate market. Obviously, the NGL market has bounced around a little bit, but certainly December, January and into February here, we’ve seen some strength there. And obviously, the ARB [ph] into the Far East markets continues to be open and supportive for that as well. So, we do see that that buffering — the weaker gas prices as well.

Operator: And your next question comes from the line of Linda Ezergailis from TD Cowen. Your line is open.